EBA publishes its advice on non-bank lending activities

Credit intermediation by companies that are not banks is not new, and some business models are indeed well established. However, the use of new technologies and the digitalisation of financial services are drawing new players to the local EU markets.

In February 2021, the European Commission (“EC”) published its call for Advice on digital finance and related issues. The EC requested the European Supervisory Authorities to analyse the fragmentation of the financial services value chain, the growth of digital platforms and mixed activities groups, and to make recommendations so that the EU regulatory framework remains fit for purpose. As part of the Call for Advice, the EBA was specifically asked to carry out an analysis of the non-banking lending sector.

On 4 May 2022, the European Banking Authority (“EBA”) published a final report (the “Report”) setting out its technical advice to the European Commission on non-bank lending. Non-bank lending is defined as lending provided by financial intermediaries outside the European financial services regulatory perimeter. This advice responds to the Commission’s call for advice on digital finance and related issues of February 2021.

The EBA observes thatthe magnitude of non-bank lending remains relatively small compared to credit provided by banks. Nevertheless, developments in the areas of Fintech and BigTech (including in relation to cryptoassets) are reshaping the landscape. Trends outside the EU (particularly in the US and Asia) show that non-traditional lenders have developed and are successfully rolling out alternative business models.

The EBA concludes that the regulatory regimes for non-bank lending remain largely unharmonised across the EU. The EBA warns that the largely unharmonised regulatory regimes across the EU may create challenges for regulators and other stakeholders. The EBA further recommendschanges to the regulatory framework that may affect lending solutions such as buy-now-pay-later and peer-to-peer (“P2P”) platforms.

The Report identifies a number of areas where provision of credit by non-bank lenders creates specific risks, and sets out proposals to address these risks. The Report focuses on four aspects: (i) supervision, (ii) consumer protection, (iii) anti-money laundering (“AML”), and (iv) macro-prudential risks.

The EBA’s proposals are likely to significantly impact the business models of non-bank lenders. Particularly, when seen in coherence with the proposed updates of the Consumer Credit Directive (“CDD”) and Capital Requirements Regulation and the proposal to adopt an EU AML Regulation.

(i) Supervision

Non-bank lending remains largely unharmonised across the EU. In some cases, a specific authorisation or registration is needed to carry out lending activities for non-banks, and entity-based requirements apply. In other cases, there are no entity-based requirements but only activity-based ones, or the activities may be unregulated and therefore no prudential or business conduct requirements apply at all.

The EBA suggests to strengthen the authorisation and admission requirements to create a more effective oversight framework. At present, various non-bank lenders are not subject to any entity-specific requirements and cannot be appropriately supervised.

The reports identifies a numbers of exemptions that non-banking lenders can rely upon under the Consumer Credit Directive “CDD”), excluding specific business models (e.g. buy now pay later solutions for smaller amounts, or micro-credit providers from a licence requirements. In line with the EC’s proposal for a new CDD, the EBA recommends removing this exclusion.

(ii) Consumer protection

The EBA also proposes to increase lenders’ disclosure requirements to ensure that they acts fair, and are effective and well-suited to new forms of lending. Against the background of marketing that does not take place in business premises and the online provision of services, advertising requirements and the scope of the required pre-contractual information warrants a review. EBA notes that the EC’s proposal in the CDD addresses these concerns to a large extent.

Moreover, the EBA proposes to strengthen the requirements for creditworthiness assessments.

(iii) AML

Not all non-banking lenders are currently subject to AML-requirements. To address this regulatory gap, the EBA proposes to bring all non-bank lenders under the scope of the European AML-framework. All non-bank lenders, even if they are not subject to licensing under financial regulation, will be required to take AML/CFT measures. The draft EU AML-Regulation already addresses this concern. If adopted, the AML-Regulation will bring more companies in scope of AML-requirements.

(iv) Macro-prudential and micro prudential risks.

To enable an appropriate mapping and obtain one integrated overview of macro prudential risks and vulnerabilities, the EBA proposes to consider setting-up a standardised reporting infrastructure at the EU level (possibly leveraging on, and avoiding overlaps with, existing monitoring tools). In addition, the EBA proposes to consider the possibility of an introduction of activity-based macro prudential measures to cover all credit providers, based on a minimum harmonisation of the tools that are already widely applied across the EU.

With regard to micro prudential risks, EBA proposes to consider the benefits and costs of minimum common requirements for non-bank lenders. This serves to enhance the resilience of the non-banking sector, ensure the continuity of the availability of financing in the EU economy, and to simultaneously strengthen customer protection.

• Click here for the EBA Final Report on response to the non-bank lending request from the CfA on digital finance (EBA/Rep/2022);
• Click here for the EBA letter to European Commission: European Commission request to EBA for technical advice on non-bank lending (EBA-2022-D-3928); 
• Click here for the Press release.